THE RISE OF SMALLER EMERGING NATIONS AS TRADING POWERS

Recent research by UBS economist Jon Anderson illustrates how trade is being reshaped in the developing world. It will probably not surprise you to learn that between 1998 and 2008 six developing nations recorded an increase in exports (as measured by manufacturing & GDP) of more than 25 percent. What will surprise you are the names of these countries.

The emerging market countries that grew their exports by the largest percentage were not the big countries one might expect, such as China, Brazil or India. Instead, they were smaller countries, with less celebrated economies. They were Cambodia, Thailand and Vietnam in South East Asia and the Czech Republic, the Slovak Republic and Hungary in Eastern Europe.

Why did these countries record the highest increase in exports?

Consult a world map and the answer becomes clear. To quote Dr. Anderson "... all of these countries sit in exactly two small locations in the world directly east of traditional developed Europe [the Czech Republic, the Slovak Republic and Hungary], or just around the shipping lanes from the original Asian Tigers [Hong Kong, Korea, Singapore and Taiwan]." As we can see, "...the largest beneficiaries of the great secular expansion in global trade were those situated next to it, either in terms of outright proximity to markets or proximity to the sea- based production chain."Click here to read full article...

We believe that it is important that the new Brazilian administration continue the many successful programs that flowed from the Lula government. Currently, Dilma Rousseff, Lula’s hand picked successor is enjoying a 20 point lead over her opponent Jose Serra according to one Sao Paulo newspaper. Should Rousseff win, will she be able to continue along the path blazed by Lula?

Brazil has prospered this past decade for a variety of reasons. After Lula’s election in 2002, a fortunate confluence of good national economic management, strong industrial production, strong exports, and relatively moderate inflation [by Brazilian standards] created increases in the standard of living for many Brazilians.
Lula’s policies have been more centrist than leftist. Brazil has enjoyed a surge in demand for products and raw materials from Asia. They have experienced a calming of inflation as a result of moderate monetary and fiscal policies, and have also enjoyed some luck as the world experienced a dis-inflationary trend at the same time. These combined events have led to strong economic growth, large increases in auto and home ownership, improvement in infrastructure build out, and an expansion of the already strong auto, aircraft and computer industries.

Brazil’s successes have had significant positive influence on the world and especially on Latin America. Brazil’s future trends will be heavily influenced by the October 3rd election and the psychology of Brazilian and global investors that result from the election.

Lula’s centrist path caused interest rates to decline. The decline allowed the purchase of autos, homes, and other goods by Brazilians, which of course stimulated economic growth and raised more families to middle class status.Click here to read full article...

The municipal bond market has performed well in recent years. A long period of declining U.S. interest rates and growing fears of rising tax rates have helped them outperform other investments. In our opinion, there are many under-disclosed risks and problems in municipal bonds of which investors should be made aware. Muni bonds are a nearly $3 trillion market, and are often sold as conservative assets. The following opinion piece from today’s Wall Street Journal by Steve Malanga discusses how some states have been less than forthcoming about their fiscal health.

Due to years of fiscal manipulations, many states, counties, municipalities, school districts, and public utilities are going to have trouble refinancing their debt in the coming years. It is not just the Wall Street banks and large public companies who have used financial trickery with their balance sheets.

Some municipal bond investors, underwriters, and issuers are hoping that the Federal Government money printing machine will come to the rescue of insolvent states, counties, and municipalities. We do not believe that hope is an investment strategy. If you have a municipal bond portfolio, please feel free to call us and we can help you understand what investment actions you might consider.
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We have long believed in free markets as the best method for creating economic growth and improving the standards of living. Economic success creates wealth, and power. In some cases, political power that is born from free market success can give the powerful the confidence to engage in high-level risk taking with the knowledge that if they win, they keep the profits; and if they lose, a government taxpayer sponsored bailout will come to their aid. This is the situation in which we find ourselves today, and why we would like to share an article from this week’s Economist.Click here to read full article...

India’s GDP is growing rapidly and is expected to rival China’s GDP growth for the next few years. Prime Minister Manmohan Singh’s government has done an exceptional job. His administration has been able to gradually decrease the bureaucratic overreach into parts of the economy and he has been able to deliver economic assistance to the people in rural areas in a more efficient manner.

Historically, government spending intended for the rural areas has in large part been misappropriated by corrupt politicians and by civil servants who accept pay but do not show up for work. In recent months technology has increased the communication between the government and villagers in the countryside. Rural populations can now report misbehavior by government employees in their regions. The technological developments have led to increased attendance at work by government employees including teachers, nurses, etc. Villagers are beginning to believe that their concerns are being heard. Handheld phones and village computer terminals have given farmers an unprecedented opportunity to sell their crops directly and avoid middlemen.

Villagers’ incomes and consumption are on the rise, and the Indian economy is expanding more rapidly due to the fact that rural as well as urban citizens are enjoying the growth. We expect Indian GDP growth in the 8%-10% range for the next two or three years, which is well above the historical pattern; a very impressive outlook.
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WHY DOES HIGH PRICED REAL ESTATE SELL SO EASILY IN CHINA?

China appears to have a huge "grey" economy, meaning that it is fueled by grey or unreported income. On July 19th, China's most famous researcher on grey income, Dr. Wang Xiaolu, stipulated that actual urban household income may be 100 percent higher than the official data reported by the government. He also concluded that China’s per capita disposable income in 2008 should have been 67 percent higher than the official data.
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SO MANY ARE CONVINCED THAT DEFLATION IS AHEAD…WE ARE NOT CONVINCED

For years, a few have believed that inflation will be the long-term outcome. We have been among them. We mentioned months ago in our commentary that there would be short term deflationary influences within the U.S. and developed economies in the last half of 2010. Even though the developed economies are struggling to grow, and we predicted that there would be concerns about deflation, we want to reconfirm with our readers that our long-term view that inflation is looming in front of us…and history bears out our thesis. Click here to read full article...

IS WAR ON THE HORIZON IN IRAN? MANY SIGNS POINT THAT WAY

Although many have predicted over the past five years that Iran would be at war with the west or Israel, such an outcome has not developed. We seldom comment on war preparation activities and have not done so recently, and although it is not our normal modus operandi, we would like to point out that currently many signs point to the potential for hostility with Iran to develop. Please note the following points.
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EMERGING MARKET GDP GROWTH: THE PAST TWO DECADES, AND OUR PROJECTIONS FOR THE NEXT DECADE

According to the IMF, World Bank, and the United Nations’ historical data, GDP growth rates have varied widely for emerging markets over the last fifty years. We will focus on the past twenty years from 1990 to the present so that we may draw conclusions to help us project future growth in the developing world. Once we are able to make an educated guess of the GDP growth, we will be able to compare it to the more thoroughly analyzed and widely predicted growth expected for the developed world.

In the 1990’s, we saw a secular decline in demand for oil and commodity prices that caused oil-producing developing nations to slow their growth. For example, Russia fell from 12% of total emerging market GDP in 1990 to only 3.3% in 2000 (source: Jonathan Anderson chief emerging market economist at UBS - see chart below). By the year 2000, the best GDP growth was found in China, Brazil, Mexico, India, Korea, Taiwan, Argentina, Hong Kong and Indonesia. China, after two difficult decades, had once again returned to the top of the rankings.

Between the year 2000 and the present, emerging markets were dominated by the fast growth of China, which greatly increased its share of emerging market GDP from 15% to 24%. India, Indonesia, Brazil, Turkey, Russia, and Korea grew nicely, although at a slower rate.

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The second quarter was very eventful. European sovereign debt came under suspicion, and many waves of fear flowed through global bond, currency, commodity, and stock markets.

The source of this anxiety and fear was the projection of future economic activity. Global bond, stock and commodity markets are a discounting mechanism of future events. They rise and fall prior to economic events which shape business activity in future years.
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